Tax Policy and Economic Growth: Lessons from the 1980s

Abstract

The past seven years of U.S. economic policy and performance constitute a truly remarkable, if confusing, experiment. Few would have guessed in 1980 that inflation would fall rapidly to 4 percent and hold pretty steady during a lengthy recovery; that productivity growth would partially rebound, the national debt more than double, capital imports reach $150 billion in a single year; or that employment would continue to expand at rates envied by other advanced economies. Perhaps fewer still would have predicted two major and two minor tax reforms would be passed in six years, a flip-flop in depreciation schedules, and a top personal tax rate below 30 percent. While it is always easier to draw inferences concerning economic growth, its determinants, and policies affecting the determinants with long historical hindsight, this paper will attempt to provide information, evaluation, and conjecture to draw some tentative lessons about the effects of tax policies in the 1980s on long-run economic growth.